Auditors’ liability for activities occurring prior to their taking office.

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The liability of the members of corporate bodies is – as is normal – the subject of an extensive and articulated dispute that is often characterized by complex judgments and very technical contents. With regard to auditors, in particular, jurisprudence has examined their profiles in relation to the wide range of tasks attributed to them. And the technical level increases when examining the liability of auditors of banking institutions.

In a very recent ruling, the Supreme Court (Court of Cassation no. 28067 of 14.10.2021) focused on two aspects in particular:

1. the supervisory obligations of auditors, also regarding activities carried out prior to their taking office, and

2. the possibility of sharing the liability with the external auditing company.

The case before the Supreme Court concerned the objection to a penalty provision issued by the Bank of Italy against the Chairman of the Board of Statutory Auditors of a bank: the alleged offences consisted in the lack of control and the failure to detect abnormal credit positions and forecast losses.

In a nutshell, the Board of Statutory Auditors was accused of failing to intervene in a timely and opportune manner regarding the deterioration of the bank’s receivables.

The Court of Appeal of Rome had upheld the objection only in relation to the deterioration of the credits granted prior to his taking office, rejecting it for the rest; and had consequently confirmed the penalty imposed, however reducing the amount.

With regard to the first profile mentioned above, the Supreme Court Judges, consistent with their orientation (see Cass. 12.07.2019 no. 18770) have instead stated that “in the presence of unlawful managerial conduct carried out by the directors, it is not sufficient to acquit the company auditors from liability given the alleged circumstance of having taken office after some of the damaging facts have taken place, if the auditors have maintained a passive behavior, did not adequately supervise the directors’ behavior, even though they were required to make a diligent effort to verify the situation and rectify it, so as the statutory auditors’ powers could come into force, in accordance with the duties of office, thus enabling the illegal conduct to be discovered and remedied, preventing further damage“.

As regards the second profile, the ruling under review, referring to a less recent decision (Cass. 29.03.2016 no. 6037), stated that “the complex organizational structure of an investment company cannot lead to the exclusion or even simply a weakening of the power and duty of control attributable to each of the members of the Board of Auditors, which, in case of confirmed deficits in the company procedures compiled for the correct and proper management of the company, are punishable in the case of omission concerning the duties of auditors, on the one hand, in terms of supervision – not only vis-à-vis safeguarding the shareholders’ interests against abuse of management by the directors, but also verifying the adequacy of the methodologies aimed at the internal control of the investment company, according to procedural parameters defined by the regulatory legislation to guarantee investors – and, on the other hand, the legal obligation of immediate reporting to Bank of Italy and Consob“.

The principles of law set out above, however, in the case at stake may only have a theoretical value. The Court, in fact, in addition to the matters studied, censured the Judges of second instance because they had failed to consider an expert’s report presented by the Chairman of the Board of Statutory Auditors and carried out by an important consulting firm, which had highlighted various elements capable of excluding the violations contested.

It will therefore be up to the Court of Appeal of Rome, as the revising court, to re-examine the profiles of liability also with reference to the period prior to taking office, but examining – on the merits – all the aspects highlighted by the expert’s report, whose observations were not taken into due consideration in the previous degrees.

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